Tesco and Sainsbury stumble after Amazon's UK grocery deal with Morrison's

The wholesale deal between rival Morrison's and Amazon will see the Bradford-based grocer will supply hundreds of its products to the US online retailer's customers in the coming months.

Tesco's was the worst hit, down by more than 3% in early trade compared to Sainsbury's being 1.3% lower mid-morning, as the stock also reacted as the company denied reports that it was planning to cut store staff numbers by 39,000 over the next three years.

A leaked document containing details of Tesco's “Project Pace” programme revealed the supermarket giant's planners have examined a scenario of slashing one-in-six store staff as a means of boosting profits.

Tesco confirmed the document, which was first published by The Grocer magazine over the weekend, was not a fake but said the calculations were part of various model scenarios it had mulled but that there were no plans to announce further job losses.

"This is not a new programme of job losses, and we are not announcing one," the FTSE 100 company said.

"We do not comment on rumours other than to say that we are transforming Tesco into an organisation that meets the needs of customers in a rapidly changing retail sector, and as such continue to plan accordingly."

Under chief executive Dave Jones, the market leading supermarket has been looking to battle previous management's accounting scandals and increasing competition from discounters Lidl and Aldi.

Coming after the introduction of the new £7.20 minimum wage in April, the Project Pace model calculated a £500m reduction in the amount paid to store staff would lead to around 39,000 job cuts within three years.

Large stores in the north of England and especially Scotland would take a bigger hit than other parts of the country under this scenario, with contracted staff hours falling by 18%.

Some analysts said Tesco's share price fall was more to do with the Amazon deal.

Josh Mahony at IG said it was clear "a degree of trepidation will be rife within the industry as to how much market share Amazon will grab within an already competitive industry".

John Ibbotson of the industry consultant Retail Vision said the Morrisons deal meant it was "game on" for the rest of the UK's Big Four supermarkets, "who suddenly don't look so big after all".

He said with this deal the final link in the chain for Amazon to take on the UK supermarket incumbents, mighty Amazon's cost advantages would make online grocery their rivals' offering much less attractive.

"Tesco could soon be about to find out what it's like to be David rather than Goliath," Ibbotson said.

"The problem for the Big Four is that if you pay £79 a year for Amazon Prime, you get the delivery free. Amazon seems content to deliver at a loss indefinitely. By contrast, it costs the Big Four approximately £20 to make a food grocery delivery, for which they can only charge up to £5.

"For the Big Four, deliveries have just become permanently loss-making. The ramifications of this for the grocery sector are huge. The only winner is the consumer.

"The Big Four are fighting back with Click and Collect, but who will want that if Amazon delivers to your door in one hour?"